Tuesday 15 December 2009 (11:00-16:30 GMT)

Joint Ventures

Inconsistency between IAS 27 and SIC 13

The Board discussed the inconsistency between the requirements in IAS 27 and SIC 13 relating to the accounting for gains and losses resulting from contributions of non-monetary assets to joint arrangements. The Board was reminded that SIC 13 requires gains or losses arising from contributions of non-monetary assets to a jointly controlled entity (JCE) to be recognised only to the extent of the interest attributable to the other equity holders. Where the non-monetary asset consists of a subsidiary that is contributed to a JCE, IAS 27 requires the assets and liabilities of the subsidiary to be derecognised and gains or losses to be recognised in full in profit or loss.

Several Board members supported the proposal to incorporate the current requirements of SIC 13 in the proposed Standard on Joint Ventures, but they questioned when the inconsistency would be addressed. It was pointed out that the areas that will need to be addressed to resolve the inconsistency will require further work to be performed and may result in the clarification of the scope and interaction between IFRS 3, IAS 27, IAS 31, and IAS 28. This will most likely delay the publication of the new Joint Ventures Standard.

A short discussion followed on whether it is possible for the Board to finalise the Joint Ventures Standard and what the most appropriate way would be in which to address the inconsistency. One Board member suggested that it be included in the post-implementation review of IFRS 3 and IAS 27.

When put to a vote, the Board unanimously agreed to incorporate the current requirements of SIC 13 in the consequential amendments to IAS 28 and to resolve the inconsistency separately from the Joint Ventures project.

Consequential amendments to IAS 28

The Board discussed the requirements of paragraph 5 of SIC 13 which lists the following circumstances in which it is not appropriate to recognise a portion of a gain or loss from the contribution of a non-monetary asset to a JCE:

• significant risks and rewards of ownership have not been transferred; or
• gain or loss on contribution cannot be measured reliably; or
• the transaction lacks commercial substance.

The Board deliberated whether those requirements should be carried forward to the new Joint Ventures Standard. The Board considered that the focus of ED 9 was on a control approach as opposed to a risks and reward approach. It acknowledged that the transfer of risks and rewards was not decisive in establishing whether control exists, but only an indicator of control. The Board further considered that the requirement of reliable measurement is stated in the Framework and that is was unnecessary to repeat statements from the Framework when discussing recognition.

The Board also noted that the requirement relating to a transaction that lacks commercial substance was designed to prevent the recognition of gains where an entity enters into an artificial transaction with the intention to 'manufacture' a gain through inflated values.

The Board unanimously agreed to only incorporate this requirement and omit the other two requirements from the new Standard. The Board considered further concerns raised by respondents to ED 9 regarding the omission of the existing requirements of IAS 31 regarding impairment losses. Several Board members noted that it was not the intention of ED 9 not to incorporate the guidance from IAS 31 and it was agreed to include the guidance in the new Standard.

Emissions Trading

Accounting for the right to future instalments

The Board discussed a paper that was prepared for the November joint meeting, but that was not discussed due to time constraints, relating to the accounting for the right to receive allowances in an emissions cap and trade scheme before the related allowances have been issued. The staff explained that the right to future instalments is a prevalent feature in most emission trading schemes and that the right to receive future instalments is typically contingent on an eligible entity continuing its emitting operations. The question that arises is whether an entity should recognise the right to future instalments as an asset.

The Board considered the following alternatives:

• View 1 - An entity does not control a resource until the contingencies related to the right to receive allowances are resolved.
• View 2 - An entity controls a resource when the entity holds a right that will result in the entity receiving allowances if the entity takes specified actions (typically continuing to emit at a specified level). That right is regarded as an option and the entity exercises it by undertaking the specified actions.

As part of the deliberations of the alternatives, several Board members questioned the logic underlying the second alternative, especially regarding what the exercise price of the option and nature of the corresponding liability would be. One Board member expressed difficulty in understanding how an option could be exercised by just continuing in business.

Several Board members expressed concern about considering whether there is an asset to be recognised without first considering whether the entity has an obligation under the scheme. There should also be symmetry in the treatment of the related asset and liability.

One Board member suggested that the staff should consider the situation in the US where farmers are paid not to farm in order to maintain the price of corn. This analogy could help provide guidance in accounting for emission trading schemes. Several other Board members supported this analogy and agreed that the issue should be considered as a whole, together with the question whether an obligation has arisen.

When asked whether there would be a difference in accounting when the emission trading scheme is a statutory/mandatory scheme as opposed to a voluntary scheme, the Board unanimously agreed that there should be no difference.

Insurance Contracts

The use of OCI

The Board considered whether it should permit or require insurers to use other comprehensive income (OCI) for the remeasurement of insurance liabilities if financial assets held to back those liabilities are not carried at fair value through profit or loss. Respondents to the Discussion Paper (DP) Preliminary Views on Insurance Contracts argued that some or all changes should be permitted to be recognised in OCI to avoid accounting mismatches, as the assets backing the liabilities are not at fair value through profit or loss and/or to distinguish short-term market volatility that might reverse over the long term of the insurance contract.

The Board agreed with the staff's proposal not to change the accounting for assets or permit the use of OCI for insurance liabilities as this would create an exemption from other standards that would normally apply to the accounting for assets.

The Board then deliberated whether it should permit the use of OCI to report some changes in insurance liabilities. The Board considered that permitting or requiring the use of OCI is likely to require complex, and to some extent onerous, procedures to determine which part of the insurance liability is backed by assets not measured at fair value, to track 'cost' information for that part of the liability, and to determine whether amounts should be recycled from OCI to profit or loss. The Board noted that any accounting mismatches could be avoided by selecting the fair value option in IFRS 9 and by a large majority agreed not to permit the use of OCI or change the accounting for insurance assets.

The Board continued to deliberate whether the use of OCI would be useful to distinguish short-term market volatility from the entity's long-term performance. Some respondents to the DP argued that IAS 19 on pensions and other post-employment benefits permit the use of OCI for those liabilities and that similar accounting should apply to insurance liabilities. The Board noted that it is not always possible to keep consistency with existing standards when developing new standards and that since it is the Board's intent to review the accounting for retirement benefits, analogy to existing pension accounting is not appropriate.

Shadow accounting

On the question of whether shadow accounting should be permitted, the Board noted that in the proposed Insurance Standard gains and losses on assets do not affect the measurement of non-participating insurance contracts. In relation to IFRS 9's OCI presentation alternative, there is no recycling of realised gains or losses. Shadow accounting would result in complex presentation that would not be easy for users to understand. The Board agreed with the staff recommendation that shadow accounting should not be retained.

Financial Statement Presentation

Definition of remeasurements

The Board discussed a staff recommendation to state that an objective of presenting remeasurement information is to enable users of financial statements to identify components of comprehensive income that are not persistent (that is, not indicative of future amounts of income) and those that are.

The staff recommendation also included explanatory guidance giving examples of items which would be considered to be remeasurements.

Various Board members expressed doubts about whether the principle of 'persistence' was generally well understood and whether the definition and explanatory guidance were sufficiently clear.

A Board member questioned whether the definition should be broader, including items such as inventory impairments and changes in tax rates.

The Board tentatively decided (by a narrow majority) to include the proposed objective in the exposure draft.

By a wider majority, the Board also tentatively decided to retain the following definition of a remeasurement:

'A remeasurement is an amount recognised in comprehensive income that reflects the effects of a change in the carrying amount of an asset or liability to a current price or value (or to an estimate of a current price or value). A current price or value includes the following measurement attributes: fair value, fair value less costs to sell, value in use, and net realisable value.'

and to include the proposed explanatory paragraphs giving examples of remeasurements.

An additional staff recommendation was made to provide guidance on the extent to which an item would need to apply observable market data to qualify as a remeasurement. It was suggested that such guidance could be confusing, and no vote was taken on the proposal.

Presentation of remeasurements

The staff presented three alternatives for the presentation of remeasurements:

• Alternative 1: Remeasurement information presented only as part of the analysis of changes in statement of financial position line items.
• Alternative 2: Disaggregation of the statement of comprehensive income into a two-column format ('income and expense except for remeasurement' and 'remeasurements') with an optional third 'total' column.
• Alternative 3: Present remeasurements in a single note to the financial statements.

The staff recommendation was for Alternative 2.

A number of Board members said that Alternative 2 was hard to read and would still need analysis in the notes to the financial statements. Another Board member voiced concerns about the optionality introduced by the choice of inclusion or non-inclusion of a 'total' column under Alternative 2.

In respect of Alternative 3, concerns were raised about the potential for duplication of information already presented elsewhere in the financial statements (in particular, items of Other Comprehensive Income).

The proposal to adopt Alternative 2 received little support, with a large majority of Board members voting to approve tentatively Alternative 3.

IFRS 5 - Discontinued Operations

Write-down of a disposal group and discontinued operations OCI items

In response to a request made by the Board at its July 2009 meeting to work with the FASB to ensure the IFRS 5 remained consistent with US GAAP, the staff presented the outcome of the work performed on the following matters:

• a. tentative decision to clarify how an impairment loss should be recognised when the impairment is greater than the carrying amount of the non-current assets in the disposal group;

• b. tentative decision to remove inconsistencies in disclosure requirements of OCI items relating to discontinued operations; and

• c. determining whether improvement of disclosures of accumulated OCI is required.

One Board member questioned whether there would be any items left to be addressed if these three matters were resolved. The staff responded that the matter relating to the definition of discontinued operations still needs to be resolved.

Without much deliberation, the Board unanimously agreed with the proposals in the following way:

• a. The matter dealing with the impairment of a disposal group is significant enough to warrant a separate project, but IFRS 5 is not the right project for it. The Board recommended that the issue should be added to the IAS 36 amendments agenda.

• b. An amendment to IFRS 5 is no longer appropriate as the matter will be resolved in the project on Financial Statement Presentation.

• c. The current disclosure requirements of IFRS 5 are sufficient. An amendment to IFRS 5 is not required.

IAS 37 Measurement

Comment deadline for limited-scope re-exposure draft Measurement of liabilities in IAS 37

The Board plans to publish an exposure draft (ED) on the revised proposals for the measurement of liabilities in IAS 37. The normal period for comment is 120 days, but the Due Process Handbook provides that if a matter is urgent, the document is short, or the IASB expects there to be broad consensus on the matter, a shorter comment period may be appropriate. As the re-exposure draft is a limited-scope document and significantly shorter than the entire Standard, the staff proposed a comment period ending on 12 April 2010, which approximates a comment period of 90 days. This will allow the staff to analyse the comments received in time for discussion at the May 2010 meeting. The staff mentioned that even if the ED is published in December, the comment period will still close on 12 April.

One Board member questioned whether there would be an overlap in comment periods between this ED and the ED on insurance contracts, due to the interaction between the two documents. Another Board member suggested extending the comment period to 120 days to allow some overlap as it is expected that the insurance ED will issued in April 2010.

When put to vote, the Board, by a narrow majority agreed to a shorter comment period of approximately 90 days ending on 12 April 2010.

Wednesday 16 December – Joint Meeting with FASB (08:00-18:30 GMT)

Revenue Recognition

Obligations for product warranties and product liability

The Boards considered two matters arising from the comment letters on the Discussion Paper (DP) Preliminary Views on Revenue Recognition in Contracts with Customers. These matters related to whether:

• all product warranties give rise to separate performance obligations; and
• product liability laws give rise to performance obligations.

Product warranties

While the DP proposed that all product warranties give rise to a separate performance obligation, most respondents to the DP disagreed. In deliberating the comments received, the Boards considered whether a distinction can be made between a warranty in which the objective is to provide the customer with cover for manufacturing defects (quality assurance warranty) and a warranty that provides cover for faults that arises after the product is transferred to the customer (insurance warranty).

Several Board members agreed that there is a difference between the warranties. One Board member noted that the discussion is similar to what was considered in the IAS 37 project on what constitutes an obligation.

The Boards agreed that:

• an insurance warranty constitutes a performance obligation
• some portion of the transaction price should be allocated to the separate performance obligation based on the standalone selling price of the warranty, and
• revenue should be recognised over time as the warranty coverage is provided.

The Boards then turned the discussion to whether a quality assurance warranty gives rise to a performance obligation. In their deliberations, the Boards considered several practical examples across various industries and agreed that a warranty provided against defects at the time of the transaction does not give rise to a separate performance obligation. An entity would therefore have to determine at the end of each reporting period the likelihood and extent of defects in assets sold and account for the unsatisfied performance obligation as follows:

• if the entity is required to replace the defective assets, no revenue is recognised for the sale of those assets until the warranty expires;
• if the entity is required to repair the defective assets, a portion of the revenue that can be attributed to the components that need to be replaced should not be recognised until the warranty expires.

One Board member questioned what would happen if an entity sold a product with both types of warranties in place. After a short discussion, it was decided that such a situation should be treated similar to an insurance warranty.

Another Board member questioned what the other side of the entry would be and whether inventory should be released when revenue is not recognised. It was agreed that to the extent that full revenue from a sale has not been recognised, inventory should not be released. The Boards agreed that the exposure draft should provide guidance on how inventory should be accounted for in such situations.

Product liability

The Board considered a related issue on whether product liability laws give rise to performance obligations. As an example, staff presented an example of an entity that would be liable for damages if one of their products caused damage to property or harm to people (for example, a television set that were to explode). The Boards unanimously agreed that the past event that gives rise to the liability is not the sale of the product but the default that occurred and that such obligations should be accounted for in accordance with IAS 37.

Sale of goods with the right to return

In considering the comments received on the DP in relation to the sale of goods with the right to return, the Boards were presented with a revised analysis of the recommended accounting treatment for a right to return. The revised approach presented by the FASB staff is summarised as follows:

• revenue should not be recognised for the goods that are expected to be returned; instead, a refund liability should be recognised for the expected amount of refunds;
• the refund liability should subsequently be updated for changes in expectations about the amount of refunds;
• an asset should be recognised for the right to recover goods from customers on settling the refund liability; and
• the promised return service meets the definition of a performance obligation, and a portion of the transaction price should be allocated to the performance obligation when it is material.

The Boards deliberated the revised approach. Several Board members expressed concerns that a return service should be regarded as a performance obligation if it is material. The staff responded by explaining the as not all transactions are accompanied by a right to return; the return service is separable from the sale of the goods and should be recognised as a separate performance obligation.

Board members still did not think that it would be useful to allocate a portion of the transaction price to a performance obligation and questioned what the entry would be on the asset side.

When put to a vote, the Boards agreed in principle with the staff's revised approach; however, the majority of Board members disagreed with the proposal to treat the return service as a separate performance obligation if material. One Board member explained that in certain legal environments there is no difference between a right to return and a quality assurance warranty and questioned why there should be a difference in accounting. The Boards agreed that there should be consistency between the treatment of quality assurance warranties and the right to return.

Estimates of uncertain consideration

The Boards were reminded of their previous decisions with regards to the determination of the transaction price and the recognition of revenue when a customer promises an uncertain amount of consideration, being:

• at contract inception, the transaction price is the probability-weighted estimate of consideration to be received;
• after inception, changes in transaction prices should be allocated to all performance obligations and recognised as revenue in the period of change; and
• recognition of revenue should be constrained if the entity cannot reliably estimate the consideration amount.

The staff explained that although the DP did not consider the effects of uncertain consideration, the Boards reached tentative decisions before the end of the comment period and, hence, some respondents also commented on those decisions. A majority of the respondents supported the Boards' tentative decisions.

To provide guidance on what a 'reliable' estimate is in the context of revenue recognition, the Boards considered to the following two criteria:

• an estimate can only be reliable if an entity has previous experience with identical or similar transactions or can reference to the experience of other entities in the same business; and
• the previous experience is only relevant if circumstances surrounding the contract are not likely to change significantly.

One Board member questioned what the difference is between uncertain consideration and unrecoverability of receivables. The Boards deliberated the matter for some time and considered whether the same principles should apply to both situations. It was agreed, however, to remove recoverability from the discussion as it stems from a violation of contractual terms and only to focus on situations where there is uncertainty about the total amount of consideration to be received as a result of the contractual terms.

When asked to vote on the matter, a majority of Board members agreed with the proposed approach and criteria for reliable estimates and reiterated that any situation involving uncertain consideration would involve judgement based on all facts and circumstances.

Leases

Contingent rentals and residual value guarantees

Lessee accounting

The Boards deliberated their revised proposed approach to the recognition of contingent rentals as expressed in the DP Leases in the light of the fact that most respondents to the DP disagreed with Boards' proposed approach.

The Boards acknowledged that the recognition of contingent rentals was the most controversial area of the DP but confirmed the view that as contingent rentals are included in a lease contract, it forms part of the lease obligation. Once a lessee has agreed to and signed the lease agreement, it has created a past event the gives rise to an obligation.

The revised approach considered by the Boards includes:

• recognition of all contingent rentals;
• no reliability criteria for the recognition of contingent rentals;
• the expected outcome technique be used in measurement of contingent rentals;
• if lease rentals are contingent on changes in an index such as consumer price index or prime interest rate, the obligation is measured using a forward rate;
• requiring the remeasurement of obligation for contingent rentals at each reporting date when there has been a material change in the obligation;
• changes in the obligation resulting from the lessee buying more or less of the right-of-use should be recognised as an adjustment to the asset. All other changes are recognised in profit or loss;
• residual value guarantees are recognised together with the obligation to pay rentals;
• residual value guarantees are measured in the same way as contingent rentals; and
• changes in the obligation resulting from changes in the residual value guarantee are recognised in profit or loss.

The majority of Board members expressed their support with for the revised approach; however, they disagreed with the proposed treatment of remeasurements of obligations for contingent rentals. As part of the deliberation on the matter, the following two additional methods were suggested:

• remeasurements that affect both the current and future periods are added to the asset and recognised through amortisation over the remaining term; or
• remeasurements are allocated pro-rata across the lease term and the portion allocated to future periods are added to the asset. The portion allocation to past periods is recognised in profit or loss.

The staff was instructed to analyse further the appropriate accounting for remeasurements, taking into consideration the alternative methods suggested and present the analysis at a future meeting. The Boards also did not vote on the treatment of changes in the residual value guarantee pending the outcome of the further analysis.

Lessor accounting

The Boards considered whether there should be symmetry with lessee accounting in the treatment of contingent rentals form the lessor's perspective.

One Board member questioned how there could be symmetry if the lessee and the lessor use different estimates to measure the lease obligation. The Boards clarified that symmetry relates to the principles to be applied and does not require the outcome to be the same.

Several Board members also expressed concern with developing a revenue model for lessors that is different to the revenue recognition model.

The Boards proposed that a reliability threshold should be instituted for the recognition of contingent rentals from the lessor's perspective.

With the exception of the reliability threshold, and pending the outcome of the analysis for treatment of remeasurements, the Boards agreed with the approach as proposed for lessees.

Scope – Intangibles and other possible exclusions

The Boards considered whether the scope of the proposed guidance on leases should exclude the following leases;

• exploration of natural resources such as minerals, oil and natural gas;
• biological assets; and
• intangible assets.

Several Board members remarked that although they agree with the direction that the staff is taking, they need to understand the reasons for excluding these leases from the scope. The Boards agreed that since there is a specific project to deal with extractive activities, and pending its outcome, these activities could not be included in the scope of this guidance.

The Boards further agreed that leases of intangible assets should be excluded from the scope but that the right to use an asset (that is, sub-leases) should be within the scope. It was agreed that since the accounting for leases is principally a cost-based measure, biological assets measured at fair value should also be excluded.

The Boards qualified that the decision to exclude these arrangements from the scope of the guidance is not an irrevocable decision and that these leases could later be included in the scope as other projects are finalised.

Scope – Non-core and short-term leases

The Boards considered whether an exemption from the proposed lease accounting should be provided for non-core leases and short-term leases.

The majority of Board members agreed to that an exemption for short-term leases should be provided. When discussing the criteria for the exemption there was uncertainty as to whether or not the criteria should be expanded to include a requirement that short-term leases should be immaterial, individually or collectively, in order to qualify for the exemption. The Boards had a long discussion about whether materiality should be specifically included in the criteria or whether the general materiality guidance would be sufficient to ensure that material leases are accounted for.

On the question of the time limit allowed for the exemption, the majority of Board members agreed that the exemption should be limited to leases with a contractual term less than one year without an option to renew the lease. Some Board members suggested a similar exemption for lessors.

Without much discussion, the Boards unanimously agreed the non-core leases should not be excluded from the scope of the proposed guidance.

Due to time constraints, the Boards did not consider the agenda papers dealing with the purchases and sales of the underlying asset or lessor accounting for investment properties. Those matters will be discussed at future meetings.

Financial Instruments with the Characteristics of Equity

Scope exemption for share-based payments

The Boards considered granting a scope exemption for share based payments from the requirements of the Financial Instruments with Characteristics of Equity project.

The Boards considered this issue in the context of the Approach 4.1 and Approach 4 (as discussed on the October joint meeting). Both Boards preferred to scope out share-based payments from the scope of the project under the Approach 4.1. Nonetheless, some Board members were concerned that a full exemption from the project was not economically justified, especially in the post-vesting period. More specifically, some Board members expressed their preference for a more limited exemption under the Approach 4 (for instance, covering only stock options in the pre-vesting period). On the other hand, other Board members were concerned that scoping-in share-based payments in the project would re-open the debates that preceded deliberations of share based payments standards on which no consensus existed.

Finally, both Boards approved a scope exemption for share based payments from the project under both Approach 4 and Approach 4.1.

Presentation of physically-settled forward purchase contracts and physically-settled written put options

The Board revisited their tentative decision (made in June 2009) that these instruments should be presented net with changes in income (consistent with other derivatives).

Most of the Board members were uncomfortable with that decision as it would lead to reporting of many changes of own share price in profit or loss. Consequently, both Boards failed to confirm their original tentative decision.

Some proponents of the gross presentation of physically-settled forward purchase contracts noted that such approach would avoid most of the structuring opportunities and that it was an approach preferred by the regulators. Nonetheless, other Board members struggled to apply such logic for physically-settled written put options or physically-settled forward sale contracts and did not see any economic justification for a different accounting treatment.

One Board member proposed an alternative of net presentation with changes reported directly in equity. As several Board members found that alternative worth exploring, the Board asked the staff to analyse consequences of such a decision. The Board expects to deliberate the issue on a next meeting.

Classifying share-settled instruments as equity

The Boards discussed the decision from the October Joint meeting to pursue Approach 4.1, which would classify some instruments settled by delivering shares as equity. This approach was supported by most of the IASB members. On the other hand, most of the FASB members preferred Approach 4 as a starting point for any potential exemptions to a general principle.

After a prolonged and inconclusive debate covering implications of each of the approaches on classification of convertible debt and fixed-for-fixed condition as well as potential for reduction of scope of the project to amend IAS 32, the Boards finally agreed refocus their discussion on the original issue. Back in October 2009 the Approach 4.1 was perceived as a minor modification of the Approach 4 that subsequently proved to be more substantive. The Boards asked the staff to come back to Approach 4 and consider a less substantive modification than Approach 4.1 and present its analysis to the Board at a future meeting.

Conceptual Framework: Phase C – Measurement

The Boards discussed an updated draft of a new measurement chapter. The Boards discussed the concepts that might be included in a discussion paper. Some Board members suggested clarifying measurement attributes, including guidance on going concern assumption as well as on the usage of alternative measurement attributes and improving articulation of the measurement concepts and their application on the Standards level. One Board member suggested that the discussion paper should not be drafted in the format of a draft chapter of the Conceptual Framework but in the form of questions to constituents on the draft conclusions reached.

The Boards also agreed to include a high level consideration of the credit risk in liability measurement in the draft chapter on measurement.

Fair Value Measurement

Updated project plan

The Boards discussed an updated project plan for the fair value measurement project with the aim to eliminate all existing differences between the IASB fair value measurement project and ASC Topic 820. The Boards decided to deliberate all issues apart from scope of the project and effective dates jointly over the next three months. The FASB stated that it planned to publish its exposure draft on changes of Topic 820 in May 2010. IASB will provide a near final draft at the same time (or consider re-exposing depending on the changes from the exposure draft) in order to allow constituents to appreciate remaining differences, if any, between the FASB and IASB guidance. The Boards aim to publish a final standard in September 2010.

Replacement of IAS 39: Hedge Accounting

Summary of outreach activities [Educational Session]

The Boards considered the feedback received on the hedge accounting from the recent outreach activities undertaken by both Boards. The overriding consensus from constituents was that the Boards should consider a principle-based approach for hedge accounting that would lead to simplification of the hedge accounting requirements.

Many constituents asked for simplification of the rules relating to designation of hedge accounting items, testing of effectiveness, and eligibility of hedge accounting as well as clearer alignment of risk management practices to the hedge accounting guidance. On the other hand, some of the FASB constituents from the user community preferred eliminating cash flow hedging instead of using its mechanics for current fair value hedging (solution preferred by the IASB and its constituents).

The Boards discussed the high level principles of hedge accounting and its alignment with risk management practices. Some Board members felt that such approach might lead to increase earnings management and thus would not support it. Others would prefer if that approach was complemented by comprehensive disclosures that would show the primary statements without the effects of hedge accounting.

This was an educational session, no decisions were made.

The Boards also provided a brief update from the recent strategic meeting on the updated plan for the financial instruments project. The Boards agreed to deliberate hedge accounting as well as classification and measurement of financial liabilities jointly in January and February 2010. For this purpose the Boards will meet twice a month in January and February 2010. Following deliberation phase, the FASB will expose its comprehensive model for comments. At the same time, the IASB will expose the remaining parts of its model. Both Boards plan to provide a joint description of differences between the models and align questions asked to constituents.

Insurance Contracts

The Boards were presented with a concise presentation of the accounting for insurance contracts with a comparison of the effects of applying the 'allocation of the original transaction price' approach, 'explicit building blocks' approach and applying the revenue recognition model to insurance contracts.

The Boards discussed the effects of application of the revenue recognition model to insurance contracts based on a numerical example. Even though some Board members saw some merit in applying that model, most Board members found it unappealing as the results were seen as not understandable for the effects of pooling, especially for insurance contracts with more 'moving parts'. Some Board members would like to discuss an alternative application of revenue recognition model to insurance contracts. The staff clarified that it went over a number of possible applications, but the results were similar in broad terms to those presented in the example.

The Boards also discussed the explicit building blocks approach. Some Board members were concerned with the possible effects on smoothing of revenues. The following discussion of this model focused on risk margins that should compensate for the inherent risk characteristics of the contracts. Some Board members were concerned with the application of this approach to contracts with multiple performance obligations and possible need for disaggregation of the margin that would lead to increased complexity.

Measurement objective

The Boards discussed the measurement objective of the insurance contracts. One Board member expressed his frustration with the whole Insurance Contracts project as he believed that the insurance industry was similar to other financial services industries and basic accounting models should apply to it, with some necessary modifications or additional (application) guidance. Some Board members expressed their already well articulated opposition to the separate risk margin component in the measurement objective. They believed that the risk characteristics of insurance contact were already embedded in the inflows and outflows of the contract, and the proposed measurement objective confused the inflows and outflows. Other Board members disagreed. They understood the risk margin component of the measurement objective as the expression of the risk embedded in the insurance contract and as a compensation for additional capital held that reflected this riskiness.

After a significant discussion both Board narrowly agreed that a reporting entity should measure an insurance contract equal to its current estimate of the amount to fulfil the present obligation created by that contract by using a building blocks approach.

The Boards also agreed that a reporting entity should estimate that cost using present value techniques that consider:

1. the unbiased, probability-weighted average of future cash flows;
2. the time value of money;
3. a risk adjustment for the effects of uncertainty about the amount and timing of future cash flows; and
4. an amount to eliminate any positive day one difference.

Margins

The Boards continued their discussion with assessing how to determine the risk adjustment (point 3 in the discussion above). The Boards considered three possible definitions of the risk margin notion:

1. the price of risk a market participant would require when taking over the obligations from the insurer;
2. the price an insurer would require to induce it assume the risk from the policyholder or another party;
3. the amount an insurer would rationally pay to be relieved of the risk.

Thursday 17 December 2009 – Joint Meeting with FASB (08:00-13:45 GMT)

Financial Statement Presentation – Cohesiveness Principle

Application of the cohesiveness principle to the statement of financial position

The Board discussed a staff recommendation to require the statement of financial position (as well as the statements of comprehensive income and cash flows) to apply the cohesiveness principle: that is, that the statement of financial position should be categorised into operating, investing, and financing assets and liabilities.

Individual Board members raised concerns over the potential for arbitrary classifications of, for example, retirement benefit obligations, but the Board tentatively decided by a wide margin to accept the staff recommendation.

Determination of classification based on the statement of financial positions

The Board discussed a staff recommendation that the classification of an item should be determined based on the statement of financial position, with that classification then applied to the statement of comprehensive income and the statement of cash flows according to the cohesiveness principle.

Board members questioned whether this requirement would have any effect in practice, as sufficiently clear definitions should lead to the same classification regardless of which statement is considered first.

Other members raised concerns about individual assets or liabilities that arise from a combination of operating and non-operating transactions (for example, retirement benefit obligations, debt factoring, and finance leases).

The staff recommendation did not receive majority support from the Board members.

Application of the cohesiveness principle to items that may have both operating and financial components

The staff presented proposals for dealing with items such as retirement benefit obligations and asset retirement obligations, which include both operating and financial components. The following alternatives were presented:

• Alternative 1: Present all such items as operating
• Alternative 2: Present all such items as financing
• Alternative 3: Present all such items as financing except for the cash contributions to a pension plan
• Alternative 4: Add a new category labelled 'financing arising from operating activities'

These proposals were debated at some length, with Board members raising a number of concerns. One Board member stated that including pension remeasurements in operating would never be acceptable to users, another that they had always considered pensions to be financing in nature.

Alternatives 1 and 3 received little support, with the Board deciding by a narrow margin to move forward tentatively with Alternative 4.

Financial Statement Presentation – Statement of Financial Position

Statement of Financial Position

The staff presented a number of proposals in respect of the statement of financial position.

• To include in the exposure draft illustrations of alternative displays of the statement of financial position (such as columnar or assets on the left and liabilities and equity on the right).
• To require total assets, total liabilities, and subtotals for short-term assets and liabilities to be presented on the face of the statement of financial position.
• To propose that a classified statement of financial position should be presented except where presentation in order of liquidity provides more relevant information.
• To propose that a classified statement of financial position must present assets and liabilities in short-term and long-term subcategories based on a fixed period of one-year.
• To drop the proposal to require disclosures on the maturities of short-term contractual assets and liabilities in the notes.
• To require cash to be presented at the entity rather than the segment level (that is, as a single balance in one of the three categories).
• To present and classify items currently termed 'cash equivalents' as short-term investments.
• To require the presentation of bank overdrafts as financing items.

Individual Board members raised concerns about the wording of the guidance on liquidity presentation, noting that it could be read that an entity in financial difficulty would be required to apply such a presentation when there should be a free choice.

The classification of assets and liabilities as long or short-term on a fixed one-year basis was noted as potentially problematic for entities with longer operating cycles.

All of the above proposals were tentatively accepted by the Board.

Disaggregation

The Board discussed a proposal to require the statement of financial position to present separately assets and liabilities with the same nature but different measurement bases.

Board members raised concerns over the potential for excessive detail in such a presentation due to the large number of measurement bases applied under IFRS. The Board tentatively accepted a revised proposal to present assets and liabilities measured on a cost basis separately from those at current value.

In addition, the staff proposed to amend the minimum line item requirements of IAS 1 to disaggregate (for example) PP&E into three lines (property, plant, and equipment).

A number of Board members questioned whether this was essentially an XBRL issue, and others highlighted the need for some guidance on appropriate levels of aggregation in the statement of financial position. The proposal was, however, tentatively approved by a majority of Board members.

Miscellaneous Issues

Basket transactions The staff presented three alternatives for the classification of basket transactions (being transactions that recognise or derecognise assets and liabilities classified in more than one category, for example a business combination).

• Alternative A Present in the operating category
• Alternative B Present in the category that reflects the activity that was the predominant source of these effects
• Alternative C Present in a separate section

The staff recommendation was for Alternative B but this was not generally accepted due to concerns over determining 'predominance' and the potentially distorting effect of a major acquisition on operating cash flows. The Board tentatively decided to proceed with Alternative C.

Foreign currency transaction gains and losses

The staff proposed that foreign currency gains and losses be presented in the same category as the assets or liabilities that gave rise to the gains and losses. This proposal was tentatively approved by a large majority of Board members.

Discontinued Operations

Discontinued Operations - Definition and Disclosures

The Boards re-deliberated the proposed amendments to discontinued operations guidance. Without much discussions the Boards agreed the (slightly modified) IASB definition of a discontinued operation:

A discontinued operation is 'a component that either has been disposed, or is classified as held for sale, and

• (a) represents a separate major line of business or geographical area of operations,
• (b) is part of a single co-ordinated plan to disposed of a separate major line of business or geographical area of operations, or
• (c) is a business that meets the criteria to be classified as held for sale on acquisition'.

The Boards also agreed that following disclosures should be included for current and prior periods presented in the financial statements:

• a. The profit or loss, together with major income and expense items constituting that profit or loss, including impairments, interest, depreciation, and amortisation;
• b. The major classes of cash flows (operating, investing, and financing);
• c. A reconciliation of the major classes of assets and liabilities classified as held for sale in the notes to the financial statements to total assets and total liabilities classified as held for sale that are presented separately on the face of the statement of financial position income;
• d. A reconciliation of the profit or loss for disposals presented in the notes to the financial statements to the after-tax profit or loss from discontinued operations presented on the face of the statement of comprehensive income;
• e. If the component includes a non-controlling interest, the profit or loss attributable to the parent.

In addition, both Boards agreed to require disclosures about disposals of long-lived assets and disclosures about significant components of an entity that did not qualify as discontinued operations but without providing details of the related cash flows.

The Boards continued with a lively discussion of additional disclosures regarding the entity's continuing involvement with the disposed component and the continuing cash flows between the ongoing entity and the disposed component. Most Board members were concerned that the proposed disclosures regarding continuing cash flows were excessive and not operational. The Boards clarified that only the disclosures regarding continuing involvement should be provided. Moreover, the Boards agreed that those disclosures should be provided only for the discontinued operations presented in the current financial statements to achieve comparability and avoid 'creating' artificial growth in earnings through classifying operations as discontinued.

The Boards agreed to propose a prospective application of the Standard with the effective date of 1 January 2011 (15 December 2010 for the U.S. GAAP).

On the need for re-exposure, both Boards tentatively agreed that re-exposure was warranted and agreed to align publication dates and comment periods. Both Boards will revisit that decision in January with a formal staff paper.

Consolidation (education session)

The Boards had a short session on consolidation where they discussed the current state of the project and the decisions made by both Boards until now. The Boards discussed the remaining agenda for deliberations and discussed the high-level differences between US GAAP and IFRS requirements and the proposals being discussed. The Boards agreed to deliberate all issues jointly in January and February 2010. The main areas for deliberations include control with less than half of the voting rights, assessment of control with options and convertible instruments, agent-principal analysis, investment companies and disclosures for consolidated and unconsolidated entities.

This was an educational session, no decisions were made.

Friday 18 December 2009 (09:00-13:30 GMT)

Effective Dates

The Board considered a proposal to align effective dates of the new and amended Standards because of the large number of major projects expected to be finalised in 2010 and 2011. The Board agreed to establish certain high level principles that should be generally applied in determining effective dates unless the particular circumstances warranted a solution specific to the individual Standard.

Without much discussion, the Board agreed that new requirements should be effective for annual periods beginning on or after a specified date rather than for periods ending on a specified date.

The Board agreed that the date specified should be limited to 1 January and 1 July except for specific facts and circumstances.

The Board also agreed that the assessment of the effective date for major projects completed in 2010 would be on the basis that it would not be earlier than 1 January 2012 and for the major projects completed in 2011 not earlier than 1 January 2013. Those guidelines would apply only for major projects completed by the Board. Interpretations, annual improvements, and narrow-scoped projects could have shorter lead periods subject to principles established earlier.

The Board discussed in detail principles related to the early adoption of a new Standard. On one hand, the Board acknowledged that early adoption was necessary for first-time adopters in order to avoid two changes in requirements in a very short time. On the other hand, given the large number of changes and extended lead time (three years for some projects), early adoption vastly reduced comparability of the financial statements among entities.

Some Board members were concerned that permitting early adoption for some projects could lead to use of hindsight (especially for comparative periods) and further reduction of transparency and comparability in the financial statements. Those members noted that stating the earliest application date for some of the projects might be useful (a similar approach was used in IFRS 3 Revised).

Some Board members were concerned how the Board applied and articulated transition requirements for new Standards (retrospective, prospective, or other transition requirements) and inconsistencies in them. The staff explained that it will present a paper on the transition requirements and their consistency at a future meeting.

The staff also pointed out that the possibility of early application combined with the number of Standards that would change would lead to multiple combinations of consequential amendments to other Standards, and those requirements might be confusing. Some Board members suggested grouping new Standards issued together and aligning their effective dates and transition requirements.

Finally, the Board directed the staff to undertake an outreach regarding the early adoption requirements that would seek views of constituents how best to alleviate their concerns arising from the number of Standards to be issued or changed.

Post-employment Benefits

Service cost

The Board considered whether changes in the estimate of service cost should be included in the remeasurement component of changes in the net defined benefit asset or liability.

Several Board members were concerned by this proposal, as it would present service costs in the profit or loss and the remeasurement component of them in other comprehensive income (OCI). Another Board member was concerned that remeasurement component of the service costs was to be presented in earnings as it would mean that the effect of the estimated changes in salaries that include effects of inflation would be presented in profit or loss whereas the effect of changes in discount rate including inflation component as well would be presented in OCI.

After a short debate the Board decided that changes in service cost caused by changes in all assumptions should be presented in the remeasurement component in OCI. The Board also asked the staff to consider a requirement for an additional disclosure that would disaggregate effects of changes in the assumptions and their combined effects.

Interest income on plan assets

The Board rediscussed the accounting treatment of the interest income on plan assets discussed in November 2009. Most of the Board members were concerned with the staff proposal that en entity should be required to calculate and recognise in profit or loss an expected return on plan assets. Those Board members believed that it would lead to all the good news (overoptimistic expected return on plan assets and overoptimistic estimate of the pension liability) presented in profit or loss and all the bad news presented in other comprehensive income.

After a considerable discussion in which a wide variety of opinions were expressed, the majority of the Board adopted the 'net interest approach' that would require interest to be determined by applying the high quality corporate bond rate to the net defined benefit asset or liability and presented in profit or loss.

Financial Instruments: Classification and Measurement – Financial Liabilities

The staff presented a summary of the outreach activities and opinions expressed by constituents on classification and measurement of financial liabilities with the emphasis on the own-credit-risk issue.

The staff clarified that this discussion applies to those financial liabilities that are managed on the contractual cash flow basis but do not fulfil the criteria for classification as basic loans. In addition, the staff noted that this discussion did not relate to the financial liabilities to which the fair value option was applied.

The staff presented four basic approaches to classification and measurement of those financial liabilities:

• (a) Fair value measurement with separate presentation of changes related to own credit in the OCI
• (b) An adjusted fair value measurement attribute (frozen credit spread)
• (c) Bifurcation (either based on criteria in IAS 39 or based on criteria in IFRS 9)
• (d) Amortised cost measurement with parenthetical presentation of fair value

The Board will hold an educational session on mechanics and potential effects of all the identified approaches in January.

Derecognition

Two FASB members joined the discussion via videoconference from Norwalk.

Modification and extinguishment of financial liabilities

The Board discussed the accounting for 'substantive modification' of a financial liability or an exchange of one debt instrument for another debt instrument with 'substantially different terms'.

Most Board members agreed that a quantitative '10% test' should be abolished as it was arbitrary, represented a bright line that was inconsistent with principle-based Standards, and led to diversity in practice.

Some Board members expressed concerns about how the 'substantive modification' notion defined in a purely qualitative manner would capture more subtle notions (for instance, changes in seniority of the liabilities that would influence fair value). Other Board members discussed the point of view from which the modification should be addressed (issuer or lender).

One Board member proposed that a substantive modification would be any modification that changes the fair value of the instrument. Another Board member expressed his opinion that the ultimate question behind the approach was when to recognise an unrecognised change of fair value of a financial instrument. He was particularly concerned that any of the discussed approaches would lead to a free choice and proposed to recognise only a change of the fair value. Other Board members disagreed because they felt that this proposal would result to a new measurement attribute that was inconsistent with other measurement attributes defined. Moreover, in their opinion, identical economic positions would be treated differently.

After a lengthy discussion the Board adopted an approach that defined 'substantive modification' that leads to extinguishment of financial liability from a qualitative standpoint: 'change in the nature of the investment the original contract represented', which would be assessed based on all the facts and circumstances. The Board agreed to provide additional guidance in the form of non-exhaustive examples as to when the nature of the original investment changed. The Board also agreed to include substantive changes in the timing, amounts, or uncertainty of the cash flows or the fair value of the original contract from that of the amended contract as indicators of 'substantive modification' of the financial liability.

Accounting for extinguishment and modifications of financial liabilities

After a brief discussion the Board confirmed the mechanics of the 'extinguishment accounting' as proposed in the exposure draft and currently defined in IAS 39.

The Board agreed to recognise in profit or loss all costs and fees related to the instruments being extinguished. On the other hand, costs and fees directly attributable to the issue of the debt instrument associated with the new liability should be accounted for in accordance with the requirements of IAS 39.

For the financial liabilities that do not fulfil the criteria for the 'extinguishment accounting' the Board confirmed the mechanics of the 'modification accounting' as proposed in the exposure draft and currently defined in IAS 39. The modification accounting would lead to adjustment of the carrying amount of the liability for any costs or fees incurred. The Board decided that an entity should recognise the gain or loss in a transaction that qualified for modification accounting immediately into profit or loss, and not include the gain or loss as part of an adjustment to the effective interest rate over the remaining term of the modified financial liability.

The Board confirmed the mechanics of the 'partial extinguishment accounting' in the context of an entity repurchasing of its original financial liability as proposed in the exposure draft and currently defined in IAS 39.

The Board continued with the deliberations on the 'debt-for-equity' swaps. The Board confirmed the guidance based on the consensus reached by the IFRIC in IFRIC 19 subject to modification of the derecognition approach on 'substantial modification' of an instrument or a portion thereof. Moreover, the Board decided that if there was a difference between the fair value of the liability that was extinguished and the fair value of the equity instruments issued as consideration, the difference should adjust the gain or loss to be recognised to the extent that the difference qualified as an asset or liability.

Modification of financial liabilities

The Board agreed in principle that in a contract modification that met substantial modification criteria (and, therefore, is accounted for as an extinguishment of a financial liability by the debtor/borrower), derecognition requirements for the financial asset of the creditor/lender should be symmetrical.

The Board discussed implication of this decision on broader financial instruments project and asked the staff to provide additional analysis on the following meeting. The staff expressed its initial view that this decision would lead to recognition of any 'day one gain or loss'. The Board asked the staff to include in the analysis also effects on the reclassification criteria in IFRS 9 and recognition and presentation of any impairment of financial assets in case concessionality was embedded in the 'substantial modification'.

This summary is based on notes taken by observers at the joint IASB-FASB meeting and should not be regarded as an official or final summary.